If yesterday’s GOP debate is anything to go by then there’s virtually no chance of Jeb extending the Bush dynasty – his performance was poor, and his funding is drying up. He won’t be 45, and will be forever excluded from the elite family discussions between 43 and 41. Perhaps that’s no bad thing, dynastic politics tends to be frowned upon in most advanced democracies. Of course the current betting still suggests that that’s what we’ll get, but that will be 42’s wife becoming 45 if there are no more Benghazi or email server revelations. Don’t hold your breath!

Before such historic events can occur we have to deal with the hurly burly of the present, and an institution that could have a significant impact on the US economy and therefore the Presidential elections was at it again yesterday. Federal Reserve decision makers have shown signs of disagreement about when interest rate normalisation – i.e., hikes – should start. We’ve heard from a range of FOMC voters – there are those firmly in the rates on hold camp and there are others who appear keen to hike rates in 2015. Yellen and her deputy are firmly in the camp that would like to see interest rates rise sooner rather than later, and the message from the Federal Reserve yesterday seems to be staying on point… this time there was less talk about global financial and economic risks that threaten the US economy, and it certainly looks like a December hike will be on the agenda. I should point out that the best forecasters still anticipate March for the first hike, albeit most of those guys have tended to hedge and say that there is still a substantial risk of an earlier hike. The reason for the Feds relative hawkishness is that despite the slowing in the pace of job growth, household spending and investment continues to move along at a solid clip, and let’s not forget the fact that jobless claims continue to fall.

I can’t say I’m too surprised, and this is the point I was trying to make recently. Any signs of strengthening elsewhere are likely to take the Fed off the leash. So what’s happened recently? Well apart from stocks recovering and a sense of calm returning to markets in general, the ECB recently talked about looking to extend its quantitative easing programme. All of this takes the pressure off the Federal Reserve because these events reduce the probability of any negative blowback on the US economy. The moment the US central bank is afforded the luxury of just focussing on the domestic economy, they can’t help but put interest rate normalisation back on the agenda.

That leads to a scenario that was firmly in play late last year and the start of this year. Those two sides of the ledger are again suggesting that EUR/USD should go down hard. These are: ECB thinking about expanding QE à EUR should weaken; and Fed thinking about hiking rates à USD should strengthen. It is no surprise EUR/USD took a hit yesterday evening, and I think this is likely to persist. Don’t expect GBP/USD to hold out, whither the euro goes, so will its neighbour the pound sterling, gravity demands it! And so we fully expect GBP/USD weakness to continue. As I have mentioned in a recent blog, the UK’s current account deficit might be another, more fundamental reason, why sterling is likely to be vulnerable in the coming months, but this in the here and now is a more immediate threat to its value…

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